Top ten employment law myths and mistakes in employment contracts

I recently attended the Law Society’s annual Employment Law Summit, which is always filled with top-notch employment lawyers providing valuable insight and practical advice on issues relating to employment law and human resources. Many of the discussions touched upon issues relating to the use of employment agreements, including termination clauses. The comments caused me to consider my own experiences in dealing with clients and seeing the types of claims that have been made, and led me to create a list of common myths, misconceptions and mistakes. At the very least, I hope that this will generate some discussion.

Myth/mistake no. 1:Not using employment agreements. For years, I have advised clients, and anyone else that will listen, to use employment agreements as a matter of course. In many cases, I am met with the comment that employment agreements convey the wrong message or set a negative tone. However, as I routinely say, the agreement does not have to be oppressive, and can be drafted and portrayed positively while still setting out the “rules of the game”. While the analogy is often made to the use of prenuptial agreements, the difference is that prenuptial agreements are generally entered into in order to deal with what happens when the relationship ends. While employment agreements can, and should, address termination of the agreement, they can also set out rights and obligations of both parties throughout the course of the relationship.

Myth/mistake no. 2:Employment agreements are only for senior executives. This is the second objection that I hear routinely. For whatever reason, many HR practitioners seem to be of the view that there is little or nothing to be gained by having the “rank and file” enter into employment agreements. However, while the dollar figures may be lower than those that are in place in executive contracts, the reality is that employment agreements are useful for every single employee in order to set out the rights and obligations, and in particular, to address what will happen in the event of termination. It can limit the company’s obligations and also remove uncertainty (which usually leads to legal costs).

Myth/mistake no. 3:Termination clauses are unenforceable anyway. When I propose using employment agreements with termination clauses, I am often met with questions suggesting that the courts will not enforce anyway, so there is no point in putting them in. While this point of view is most often expressed when discussing termination clauses that limit the employee’s entitlement to employment standards legislation minimums, it is often made in reference to termination clauses generally. The reality is that termination clauses, including those that are based only upon employment standards legislation, will be enforced so long as they are properly drafted and the contract itself is properly entered into.

Myth/mistake no. 4:Using termination clauses that breach statutory minimums. Some companies insist upon including termination clauses that do not even provide the absolute minimums required by statute. Sometimes, this is intentional. In other cases, it is the result of a misunderstanding that employment standards legislation provides for one week of notice per year of service, up to a specified maximum. While that is a generally accurate description of the Employment Standards Act of Ontario, there are some nuances. Perhaps the most important nuance is that employees are entitled to at least one week of notice/pay in lieu after three months of service. Any clause that provides for one week of notice for every completed year of service is offering less than the statutory minimum, and is likely to be deemed unenforceable. Once such a clause is considered to be unenforceable, the courts will not attempt to replace it with what they believe the parties intended. Rather, the parties will revert to the common law requirement of reasonable notice.

Myth/mistake no. 5:As a policy, we have every employee sign an employment agreement on their first day of work. This is a common mistake. Companies often have employees sign a series of documents when they arrive for their first day of work, and one of those documents is the agreement that they hope to rely upon. However, the reality is that the parties already have a verbal agreement in place. That contract is based upon the terms that were discussed and a multitude of implied terms and conditions such as the requirement to provide reasonable notice of dismissal. Once that verbal agreement exists, the employee cannot simply be asked to sign a new one that reduces their rights. Some new consideration is required. That issue is addressed in the next paragraph.

Myth/mistake no. 6:Having all existing employees sign employment agreements without providing appropriate consideration or notice. In some cases, employers realize that they should be using employment agreements for all their employees. However, they find themselves in the unenviable situation where all of their current employees, be they a handful or several thousand, do not have contracts in place. Some try to have all of their employee sign agreements in order to rectify this situation. However, even if they employees agree to do so, it is unlikely that the contract will be enforceable unless the employee was provided with reasonable consideration.

While I have never seen a definitive answer as to how much consideration is required, the reality is that most judges will not enforce a contract that limits an employee’s rights if they were only provided with a token amount of consideration. There must be real value to the exchange. Historically, it was possible for parties to a contract to change terms of the contract by providing notice of the change. The amount of notice required would be the same as that required in the event of dismissal. While a relatively recent Ontario Court of Appeal decision has caused some experts to question whether notice can still be used in this context, it is my view that, in most cases, that is an acceptable approach. However, in many cases, the amount of notice required will be impractical.

Myth/mistake no. 7:Limiting the definition of just cause for dismissal. At common law, employers can dismiss an employee without notice or pay in lieu if they have just cause for the dismissal. Just cause can be established through misconduct or performance issues. Needless to say, the issues cannot be trivial, and our courts have made it clear that to determine whether summary dismissal is appropriate, one must look not only at the impugned conduct or performance, but at the entirety of the relationship. However, I have seen contracts of employment that attempt to define what will constitute just cause. In many cases, they give examples (such as insubordination or harassment), but do not expressly incorporate the common-law definition of just cause. Arguably, these contracts limit the definition of just cause to be applied to those specific types of misconduct that are explicitly mentioned in the agreement.

Myth/mistake no. 8:Failing to ensure that the termination clause will continue to be enforceable despite changes in the relationship. In some cases, an individual signed an employment agreement when they were the stock boy, only to make their way up the ranks of the organization to the senior executive level. When they are dismissed 25 or 30 years later, however, the company purports to rely upon the termination clause in the original agreement which provided only for the statutory minimum amount of notice. Plaintiffs in some cases have successfully argued that the fundamental nature of the relationship had changed so dramatically that the plaintiff should not be held to the termination clause in the original agreement.

In order to avoid such an outcome, employers can take steps to protect themselves. First, the contract should make it clear that the termination clause (and other clauses) will remain in force despite any changes to, for example, position or compensation. In addition, the employer can have the employee reaffirm the terms and conditions of the agreement every time there is a substantial change; for example, any time an individual is given a promotion or a raise.

Myth/mistake no. 9:Assuming that there is always a probationary period. The Employment Standards Act of Ontario provides that no notice of dismissal or pay in lieu thereof is required if an individual is dismissed within the first three months of employment. However, that does not displace the common-law requirement of reasonable notice. Many people assume that every contract of employment automatically has a probationary period implied into it. However, that is not the case. If an employer wants to have a probationary period, they must specifically say that in the contract, and also specify what the terms of the probationary period will be. It is not sufficient to simply say something along the lines of “three month probationary period”. The parties will have to specify what is intended; for example, that the individual can be dismissed without notice or pay in lieu during the first three months of employment.

Myth/mistake no. 10:Termination clauses should always provide for the absolute minimum amount of notice. Some employers have adopted the approach of including termination clauses in every contract of employment (which I recommend), but insist that they will only provide for the statutory minimum amount of notice. While that may be appropriate in some contexts and for some positions, it is not what I would recommend in most cases. Particularly for professional or executive employees, making an offer with such a clause can be seen as insulting or demeaning. It certainly does not suggest that the individual is seen to be of value to the company, nor does it send the message to other staff that that the employer treats its employees fairly.

While I encourage employers to have every employee sign a contract that includes a termination provision, I encourage them to consider each one and put a clause in that is reasonable in the circumstances. The parties can be as creative as they wish. I have seen clauses that simply provide for a certain amount of notice per year of service, clauses with absolute amounts of notice regardless of length of service, and clauses that provide for a minimum amount of notice with an additional amount each year. So long as the terms do not breach the statutory minimums, the parties are free to agree to whatever they like.

I would be interested to know what readers of this article are doing with respect to employment agreements and, in particular, termination provisions.

Stuart Rudner
Miller Thomson LLP

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Stuart Rudner is a leading HR Lawyer, mediator and a founding partner of Rudner Law, a firm specializing in Canadian Employment Law. At Rudner Law, their approach is simple. They want to understand your circumstances, your concerns, and your goals. They will then ensure that you understand the legal regime along with your rights and obligations. Once that is done, they work with you to design a cost-effective strategy that meets your needs. They want to be your trusted advisor.Read more